One of our most frequently asked questions is “What is the DSO rating?” You’ll see this phrase located in the top right hand corner of our dividend lists. The DSO (Dividend Stocks Online) rating uses the most important data points available to rate the past performance of dividend stocks. These factors include the dividend yield, the 5 year dividend growth rate, the 3 year net income growth rate, free cash flow yield, the payout ratio and the stocks recent change in value.
Each of these criteria can be used to help evaluate stocks on our high yield dividend stocks list.
We like stocks with above average yields and therefore give preference to stocks that have a dividend yield of 4% or more. Stocks with a dividend yield over 12% and under 3% receive a slightly lower rating.
5 Year Dividend Growth Rate
The best dividend stocks to invest in are those that have consistent and strong dividend growth. We give preference in our DSO rating system to stocks that have a 5 year dividend growth rate of 5% or more. Stocks that have a negative growth rate are severely penalized.
3 Year Net Income Growth Rate
Income growth drives stocks higher and increases a company’s ability to pay and grow its dividend. Our rating system rewards companies that have a 3 year net income growth rate of 10% or higher. Lower growth rates receive lower ratings and stocks that have negative income growth rates receive no points from this category.
Free Cash Flow Yield
Free cash flow yield is determined by taking the cash flow per share a company is expected to earn divided by its share price. This ratio is used to determine the value of a stock and the sustainability of the dividend. We look for a cash flow yield that is higher than the dividend yield.
A stock’s payout ratio is calculated by dividing its earnings per share by its annual dividend. This expresses the percentage of earnings that are paid out as dividends. This is useful to dividend investors because it helps us understand how sustainable the dividend is at current levels. For example if a company has a payout ratio of 95% we should be concerned that they will not be able to maintain that dividend. We give our highest rating to stocks that have a payout ratio under 65%.
1 Year Performance
This one speaks for itself. We calculate the ROI for shareholders over the last year and give our highest rating to stocks that have gained 10% or more. Stocks that have had negative returns receive our lowest scores.
Consecutive Dividend Increases
While we cannot list the years of consecutive dividend increases on every dividend list we do feature it on our safe dividend stocks list. We go back and add points to stocks that have increased their dividend for 25 consecutive years or more.
No rating system is perfect but we believe our DSO rating can help dividend investors as they research income stocks. Our dividend lists are not buy lists or recommendations. Happy dividend hunting!